How to Find the Best Mortgage Rates and Lenders in 2021
- Some Terminology
- Type of Mortgages
- FHA Mortgage loan
- What to Know Before Applying for a Mortgage
- Mortgage Closing Process
- Mortgage Down Payments
- Underwriter and Appraisal
- Purchase Versus Refinance
- Calculating Mortgage Interest
- How to Find the Best Mortgage Rate
Whether you are purchasing a home for the first time or refinancing a residence that you currently own it’s important to understand some of the nuances related to mortgages. A mortgage is a loan used to purchase a home and the collateral is the house which is pledged to your lender. Mortgage lenders are generally banks but over the past couple of decades other financial players, such as credit unions have moved into this space to take advantage of growing home ownership. There are two general types of mortgage
There are two general types of mortgage loans and numerous variations of the benchmarks which are fixed and variable rate mortgages. The process of applying is generally straightforward, but you should know what a lender is looking for before you apply. Understanding what affects your mortgage rate, will also help you save money, as mortgage costs can add up if you’re not careful.
Before we dive into the different types of mortgages that are available, will quickly cover some basic terminology that is used when discussing mortgages.
Mortgage Lender – This is the bank or credit union that issues a mortgage loan
Interest rates – This is the rate that you will be charged to borrow the capital needed to purchase your home
Principle – This is the non-interest portion of your mortgage loan
Points – This is an upfront payment that is used to reduce the interest payments that you are charged on your mortgage loan
Fixed Rate – this is an interest rate that remains constant through the life of your mortgage loan
Adjustable rate – an interest rate that is variable and changes with a specified benchmark such as the prime rate
Down payment – This is money that you put down as your contribution to the purchase of a home
Private Mortgage Insurance – This is insurance that you pay if you cannot afford the required down payment.
Type of Mortgages
The benchmarks of the mortgage industry are fixed and floating mortgages, but there are dozens of variations that are used to make each specific type of mortgage attractive.
A Fixed Rate Mortgage – is a loan where the interest that you pay over the life of the mortgage is a fixed rate and does not change at any point while your mortgage is active. For example, if your mortgage loan has an interest rate of 4%, then your annual payment is 4% of the outstanding principal.
What you need to know
A fixed rate mortgage generally has a higher interest rate than other loans. It allows you to lock in your rate for an extended period, and therefore attracts a premium. Many home buyers want the certainty of a fixed rate loan because they can create a budget as their payments remain fixed throughout the life of the loan.
The fixed rate loan is the most popular mortgage loan representing nearly 75% of the outstanding mortgage loans in the United States. A fixed rate loan has maturities of 30-years, 15-years, and 10-years, with the 30-year loan as the most popular options.
Adjustable Rate Mortgage – is a loan where the interest rate that you pay changes based on criteria spelled out in your loan documents. Generally, the loan is fixed for a specific period and then becomes variable. For example, your loan might be tied to changes in the prime rate. Some of the more popular indices that are used to determine the floating rate of an adjustable rate mortgage are 1-year constant-maturity Treasury securities, the cost of funds index, and the London Interbank Offered Rate which is known as LIBOR, as well as the prime rate.
What you need to know
Adjustable rate mortgages usually have interest rates that are lower than fixed-rate loans. You are receiving a benefit since there is uncertainty attached to this loan once the fixed period lapses. This is because you are taking the risk that interest rates will remain low, and will not adjust higher at some point in the future. There are many different types of adjustable rate mortgages including:
3/1 ARM – This loan is fixed for the first 3-years of the loan and then adjusts annually for the next 30-years based on an index, such as the prime rate, for the balance of the loan.
5/1 ARM – This loan is fixed for the first 5-years of the loan and then adjusts annually for the next 30-years based on an index, such as the LIBOR, for the balance of the loan.
10/1 ARM – This loan is fixed for the first 10-years of the loan and then adjusts annually for the next 30-years based on an index, such as the COFI, for the balance of the loan.
FHA Mortgage loan
These are loans that are extended by Federal Housing Administration-approved lenders. These loans are generally geared toward low to middle-income borrowers who for various reasons are unable to get the approval necessary for conventional home loans. You must have a credit score above 580 to be eligible for a 3.5% down payment. If your score is worse than 580, you are not automatically disqualified but will have to put down a least 10% when you take out your loan. The loan limits on FHA loans are determined by each state. You can see if limit here.
VA Loan (Veteran Affair Loans) – A VA loan is guaranteed by the United States Department of Veterans Affairs, and issued by qualified lenders. These loans are designed to offer to finance to veterans or their surviving spouses.
What to Know Before Applying for a Mortgage
The mortgage applicate process is relatively straightforward, but there are several of things you should know before you begin the application process. Remember, a lender wants to know that you can pay back your loan, and if for some reason you can’t, the lender wants to make sure that the collateral is sufficient to cover the outstanding balance.
You can fill out an application online or on the phone. You can apply for a loan directly at a bank or credit union, but you can also use our mortgage rates comparison tool to find the loan that fits your needs.
When you fill out your application some of the questions will be:
What is your credit score? – A lender will run your credit and receive an average score from the 3-major credit agencies, which are Equifax, Experian, and Transunion.
A lender is generally looking to issue loans to candidates that have a credit score in the good to excellent range. If your credit score is fair or poor, there are alternatives, which include applying for an FHA loan or purchasing mortgage protection insurance.
You will also need to pay an application fee that can vary from lender to lender.
Mortgage Closing Process
Once your mortgage is approved by an underwriter, you will set a closing date. The purchase of a home is a legal transaction that requires a lawyer, and fees that need to be paid for the closing process.
Some of the fees include, but are not limited to: Here is a full range of fees.
- Appraisal fee
- Attorney Fee
- Closing Fee or Escrow Fee
- Credit Report
- Escrow Deposit for Property Taxes & Mortgage Insurance
- FHA Up-Front Mortgage Insurance Premium (UPMIP)
- Home Inspection
- Homeowners’ Insurance – paid upfront
- Lender’s Policy Title Insurance
- Lead-Based Paint Inspection
- Owner’s Policy Title Insurance
- Origination Fee
- Pest Inspection
- Private Mortgage Insurance (PMI)
- Property Tax
- Recording Fees
- Survey Fee
- Transfer Taxes
- Underwriting Fee
- VA Funding Fee
The lender will also want to check on your ability to pay back your loan by evaluating your income. This could include your monthly paycheck from your job, any dividends or interest you receive from owning assets, as well as, any additional money you receive such as alimony or palimony. Many times, a lender will want to see your tax returns from prior years.
A lender will then determine based on your application if your monthly income, will cover your outstanding debts which include the loan you are looking to use to purchase your new home. You can reduce the amount that you are trying to borrow, by increasing your down payment.
Mortgage Down Payments
A down payment is your contribution to the purchase of a home and is your skin in the game. A lender will generally require you to put down as little as 3.5% for an FHA loan, and as much as 50% for some coops in Manhattan. As a rule of thumb, you should expect to put down 20% of the purchase price when buying a new home. If you cannot afford the down payment, and cannot borrow it from a relative, a lender might require you to purchase mortgage insurance.
Private Mortgage Insurance (PMI) pays off if you do not make the payments on your loan. The insurance typically costs between 0.5% to 1% annually based on the entire loan amount. For example, on a $500,000 loan, you could be paying as much as $5,000 a year, or $416.66 per month, assuming a 1% PMI fee.
Underwriter and Appraisal
If your application is approved, it will be sent to an underwriter for processing. Just because you have an approved application it does not mean that your loan is approved. An underwriter will evaluate the value of the home, your employment information, and your credit score to determine if you meet the criteria to receive a loan. Your lender will likely send an independent appraiser to the home to estimate its current value. The lender wants to make sure you are not overpaying, and if you default, they will not get stuck with a house that is overvalued.
Purchase Versus Refinance
When you refinance your home, you are taking advantage of lower interest rates to take out a new loan from a lender to reduce your monthly interest costs. For example, if a 30-year fixed rate declines from 4% to 3%, your savings is 1% per year for 30-years on the entire outstanding loan. If you borrowed $100,000, this would be $1,000 per year for 30-years or $30,000.
Calculating Mortgage Interest
There are several techniques you can use to calculate your total mortgage interest payment. There are plenty of online mortgage calculators that provide this as a free service. To calculate total interest using loan payments you can evaluate the total interest you will pay on your loan using your monthly payment. This does not include your PMI, or insurance or taxes.
You start by multiplying your monthly payment by your number of payments. Subtract your principal form your payments and this number will tell you the interest over the life of your loan.
For example, if you are paying $1,000 on a 30-year, $300,000 loan, you would multiply $1,000 by your number of payments, 360 (12 payments per year*30 years), to get $360,000. Your total interest paid would then be $360,000 – $300,000, or $60,000.
If you are looking to determine your monthly payment you could use a similar back of the envelope method. If your total payment is $360,000 and you have a 30-year loan (360 payments), then your monthly outlay is $360,000 / 360 (payments) or $1,000 per month.
How to Find the Best Mortgage Rate
There is no such thing as the best mortgage rate, as every buyer has different criteria that are important to them. You should weigh several factors, which include your monthly payment, how much you can put down, and how long you will be in your new home.
Once you have determined the loan that is right for you, you can then figure out how to find the best mortgage rate. If you have good credit and can afford a down payment, your mortgage search should be relatively straightforward. The mortgage market is very competitive, and banks and credit unions will try to list their most competitive rates on their website as well as our mortgage rates comparison tool above. A larger down payment can help reduce the rate that you will pay. Also, try to boost your credit score. A better credit score equates to a lower mortgage rate. Lastly, consider how long you will likely live in your home. If this is the house of your dreams and you plan on staying forever, then a 30-year fixed is likely the best bet, but the rate will be higher than an adjustable rate mortgage. If you believe that your house is a starter home, and you only plan on living there for 5-years or less, then evaluate a 5-1 ARM, as the rates will be lower, providing you with lower monthly payments.
There are many benefits to using a mortgage to purchase a home. The IRS allows you to deduct the interest you pay on your loan from your income on your tax returns. This can significantly reduce the cost of net payments. Before you begin the process of applying for a loan, you should know what to expect as well as the costs involved in apply and closing a home low. Understanding what will affect your mortgage rate, which will also help you save money, as mortgage costs can add up if you’re not careful.
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